On Monday Sept. 11 BARRICK GOLD of Toronto announced a deal to sell its stake in the South Deep gold mine in South Africa. Its 50% indirect interest in the mine will be sold to Johannesburg-based GOLD FIELDS LTD. for US$1.525 billion (US$1.2 billion in cash plus US$325 million in shares). The deal needs to be approved by South African regulators, but is expected to close early next year.
This comes as no surprise. Barrick is mainly known as a low-cost miner (cash cost of US$227/oz of gold in 2005), with most of its expertise in open pit mining, and its largest assets based in the Americas. While South Deep was not a comfortable fit for Barrick, it is much more in tune with the expertise in deep mining in the Witwatersrand Reef of Gold Fields. In fact, Gold Fields plans to go after 100% interest in South Deep by dealing with Barrick’s joint venture partner, WESTERN AREAS LTD.
South Deep was one of the major assets acquired when Barrick purchased Placer Dome last March. For US$10.0-billion ($1.3 billion in cash plus Barrick shares), Barrick got 50 million oz of gold in reserves plus 6.2 billion lb of copper reserves. Ignoring the copper for the moment, Barrick bought Placer’s gold reserves for US$200 per ounce.
Immediately upon that closing, Barrick announced that it was selling off many of its smaller assetsthe Campbell mine and Musselwhite and Porcupine joint ventures in Ontario, plus 50% interest in the La Coipa mine in Chile and 40% interest in the Pueblo Viejo project in the Dominican Republicto Vancouver-based GOLDCORP. This sale to Goldcorp of 10.31 million oz of gold in reserves rang in at US$1.6 billion in cash. (This was a good deal for Goldcorp, buying up gold for US$155/oz, and increasing its own reserves by 72%.)
South Deep has one of the largest gold resources in the Witwatersrand Reef, which in turn holds the largest gold resources in the world. Barrick’s half of its 29.3 million ounces of gold in proven and probable reserves comes to 14.65 million oz. But the South Deep mine has been a problem child since Placer Dome bought its interest in 1999 for US$235 million, becoming the first North American miner to take a significant stake in the Witwatersand. Heavy workforce reductions, building the expensive twinned mine shafts followed by an accident in early May knocking one shaft out of commission for a year, has taken the lustre off the asset. In 2005 (before the accident) South Deep produced 461,119 oz of gold at a cash cost of US$387/oz.
With this sale, it is clear that Barrick is retreating from many of the underground mine assets that it acquired with Placer Dome, preferring to stay in its own comfort zone of open pit mines based in North and South America. After the South Deep sale, Barrick will be left with 26 operating mines. Besides its own underground mines (Eskay Creek and Hemlo in Canada and Bulyanhulu in Tanzania), Barrick will still have three inherited from Placer Dome: Turquoise Ridge (formerly known as Getchell) in Nevada, and the Kalgoorlie and Osborne mines in Australia. The rest are open pits.
The sale of its interest in South Deep will cause Barrick’s gold reserves to drop by 14.6 million oz, or about 10%. Its 2007 gold output forecast of 9.5 million oz will decline by only 2.5% according to a report by Merrill Lynch, which goes on to note that the South Deep sale will lower Barrick’s cash costs by several dollars per ounce.
Using a back-of-the envelope calculation, it would appear that, after the sale to Goldcorp and the intended sale to Gold Fields, Barrick will end up having paid US$6.875 billion for about 25 million oz of Placer Dome gold reserves, or US$275/oz.
Wait a second. That’s quite an increase from the $200/oz initial cost.
There are instances when some gold ounces are worth more than others, and for Barrick this is one. I suspect their executives are starting to sleep much better at night, knowing that South Deep will soon be someone else’s asset/problem.